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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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What are two ways to report a company’s net cash flow from operating activities? Briefly describe each method.

To determine

Introduction:

Cash flow from operating activities calculates the inflow and outflow of cash from day-to-day activities. It includes operating income and operating expenses for the year. It can be calculated by using two methods i.e. indirect method and direct method.

To describe:

The various method to report the cash flows from operating activities.

Explanation

Direct method

The direct method helps us to record cash flows from operating activities. Cash flows arise from collections from the customers and cash payments to suppliers, employees and others. The direct method also reports cash outflows for income tax and interest paid. One loophole that the direct method have is that a company might not be able to record the information in the necessary form. For example, if the company is using accrual basis of accounting it will have to show its cash and credit sales together -- they will have to make special provision to track its cash sales separately.

Indirect method

The indirect method helps the company to convert accrual basis of accounting to cash basis by adjusting the net income...

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